Export woes may spur yuan rethink
SCMP headline, November 4
To the pictures. In one line the first chart shows you the import growth rate of the United States and Europe combined and in the other line the export growth of the 10 largest economies of East Asia combined.
For those of you who want full technical definition, this represents three-month averages of year over percentage change in US dollar terms with re-exports excluded.
For those of you who want to know which is which, I'm not telling and you don't need to know. Call them Tweedledum and Tweedledee. They're effectively the same. When America and Europe want to buy, Asia sells. When they don't want to buy, Asia doesn't sell. The buyers set the pace and just now they don't really want to buy that much.
The second chart breaks down the Asian export growth figures and here, in contrast, it is well worthwhile noting which is which. China leads. The rest of Asia follows. The growth rates of both have obviously come down from their 2010 peaks but China is still clearly gaining market share.
Now it is true that Beijing's currency policies have in recent years created yuan strength against other Asian currencies, particularly this year against the Japanese yen and the Indonesian rupiah, the one a hi-tech competitor, the other a low wages competitor.
But then here is my question: if a weak national currency helps to boost a country's export performance as much as it supposedly does, how has a strong currency China continued to pick up export market share from weaker currency Asian competitors?
Answer: because China's currency of trade is not the yuan but the US dollar. It has always been thus and will continue to be as long as the central government's habit of poking around in things it doesn't understand makes it impossible to price industrial effort properly in yuan terms.
The yuan has little impact anyway on China's exports. I would be surprised if the yuan value-added component has yet exceeded 10 per cent of the final retail sales price abroad. It consists of little more than assembly wages. Required imports account for much more and are US dollar-based.
Playing around with the yuan's exchange rate may thus give mandarins in Beijing great delight and wonderful delusions of importance but isn't likely to affect the trade picture much.
And they cannot really afford to weaken the yuan anyway. Last year saw a net capital outflow of US$96.5 billion, the first in 12 years, an inexplicable and uncomfortable experience for them. A big push on the yuan to encourage people to bring their money back then reversed this deficit and the capital account showed a US$105 billion surplus in the first half. Go soft on the yuan and that big deficit will just come right back again.
This is not to mention that Beijing has further delusions of making the yuan a world reserve currency. The US dollar can go weak and still remain one but a weak yuan hasn't a hope.
In summary, no export woes that I can see but Beijing can always create them.